Top MGPA Exec Details Asia Property Plans

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As BlackRock, the largest asset manager in the world, expands into Asian real estate for the first time, it is targeting key markets such as Japan and Australia, according to the top executive of its fresh acquisition target, MGPA.

BlackRock is betting that the likelihood of higher interest rates and the region's fast growth will create strong demand for property in the next few years, MGPA executive chairman Jim Quille told WPC.

"Their view is that real estate is likely to the beneficiary of capital flows in the next few years, and Asian real estate in particular," Quille said. "Japan, China and Australia are the three markets we are investing in at the moment -
we think they represent the best value."

BlackRock is clearly keen to capitalize on further potential capital gains in Asian office space. On May 21, the company announced it would buy MGPA, an opportunistic and value-added private equity real estate investor. That doubled BlackRock's real estate assets to $25 billion, and gave the company its first exposure to Asian property. The deal is due to close in the third quarter.

"We are $12 billion [in assets], and we operate in virtually all the markets they don't operate in," Mr. Quille said. "Instantly they have a global footprint and the two businesses are very complimentary."

But the region is not uniformly attractive.

"Hong Kong is clearly very pricey and very toppy and it's not a market we would be attracted to at the moment," Quille said. "We've been into Hong Kong four or five times in the last 15 years. We move in when the cycle is attractive."

Hong Kong's financial district, Central, has rated the most expensive market for office property for three years in a row, according to the property brokerage CBRE, with overall occupancy costs of $235.23 per square foot per year. London's West End, in second place, is the only non-Asian market in the top five, with Finance Street and Jianguomen business district, both in Beijing, and New Delhi's Connaught Place district also at the top of the rankings. West Kowloon in Hong Kong and the Maranouchi/Otemachi districts in Tokyo also rank in the top 10.

BlackRock joins its former parent, the Blackstone Group, in targeting Asian real estate. Blackstone closed its first Asia-focused private equity property fund in mid-June, at $1.5 billion, the second-largest Asian fund raising in history behind Fortress Investment Group's $1.65 billion Japan fund raised at the end of last year.

MGPA, formerly known as Macquarie Global Property Advisors, has 13 offices in Asia and Europe. In terms of real estate, it has no overlap with BlackRock, which previously only had $14 billion of its assets in real estate, all in the United States or the United Kingdom, out of $110 billion in alternative assets.

MGPA believes it has an advantage in that, like Canadian real-estate giant Brookfield Asset Management, which also recently expanded into Asia, it manages its own properties rather than simply investing in them.

With the Asia Square development on Marina Bay in Singapore, for instance, MGPA was both project manager and development manager.

"We did everything from acquiring the land, managing the design, putting out the tenders for construction, we will take it through to fully leased, asset manage it and ultimately dispose of it," Mr. Quille said. "That's a set of skills that not too many people have in the funds space."

Developers such as Hongkong Land and CapitaLand also take projects from the drawing board through to the sales process and exit, but they typically do not launch funds and take in third-party investment. If money does start flowing into Asian real estate, Quille feels that will give BlackRock and MGPA an advantage over fund managers that simply invest in properties and hire external managers rather than getting their hands dirty with direct management of the buildings.

"The allocators tend to suffer when capital comes into the market in a big way," Mr. Quille said. "The partner wants to gravitate to the lowest source of capital and the deals you thought you had go away."

Besides Tokyo and Australia's main cities, where yields are attractive and some investors are still looking to shed holdings to pay down debt, MGPA is working on deals in Shanghai. It feels there are opportunities to renovate and reposition older office buildings in China, Mr. Quille said.

Post-quake, Tokyo has attractive investment potential in Grade B buildings and even Grade C projects built before earthquake-proofing requirements were upgraded. Owners can achieve higher rents by updating standards and renovating office interiors.

"If you are an investor seeking alpha in your portfolio we think the value-added space offers great opportunities in a variety of markets, including Japan and China," Mr. Quille said.

Tokyo offers one of the world's best investment opportunities at the moment, Quille said, since the borrowing cost is virtually zero and yields on office space in particular are relatively high. MGPA has also been able to find buildings for sale that are available at less than replacement cost.

"We are finding a lot of opportunities where we can reposition them," Quille said. "We don't need rental growth inefficiencies, where we can improve operating efficiency and lower costs."

China is also attractive because credit is in short supply, and that has prompted more attractive deals to come to market, Quille said. MGPA is focusing on buildings constructed in the last eight years that are now in need of renovation and repositioning. The company believes retail and office real estate is more attractive in China than residential and industrial, Quille said.